Government Shutdown 2019: How it Affects Tax Return Filings and Tax Refunds

How the government shutdown will affect tax returns and refunds

You should be able to file a tax return, but don’t expect those refunds as long as the shutdown drags on.

The federal government remains partially shut down as President Donald Trump refuses to sign a spending deal that doesn’t include $5 billion for his wall at the US-Mexico border. But as Americans start to think about filing their taxes, they may wonder: How will this affect tax returns and refunds?

The short version: If the federal government shutdown doesn’t last too much longer (that is, if it ends in the next couple of weeks, before mid-January), there shouldn’t be a noticeable effect on getting your tax refund or any other processing. That’s because the Internal Revenue Service (IRS), which handles federal taxes, wasn’t planning on tax season fully starting until later in January, anyway. And once the IRS begins accepting tax returns, you’ll still be able to mail them in or submit them online even if the government is still shut down.

But if the shutdown drags on longer, there could be delays and other serious problems at the IRS. For one, the IRS’s contingency plan only explained how the agency would handle the first five business days — through December 31 — of a shutdown. As a shutdown lasts longer, the agency will have to rework its plan, and head into more uncertain territory that could demand, for example, that agency employees show up to work without pay.

The long version: As part of the government shutdown, the IRS planned to keep 12.5 percent of its workforce, or fewer than 10,000 federal employees, working. The tens of thousands of other IRS workers are furloughed, so they’re no longer paid or expected to show up to work for the time being.

But as Politico reported, that could change as tax filing season begins — and some workers could get called back and be expected to work without pay (at least until they get back pay once the government reopens).

The remaining workers and those called back without pay will let the IRS continue some operations in the short term, particularly functions that are automatic (and require limited to no workers) and those deemed “necessary for the safety of human life or protection of government property.” Some examples: processing electronic returns, processing returns with payments, mailing tax forms, appeals, criminal law enforcement and investigations, and technical work to make sure computer systems remain up and running.

So taxpayers will be able to mail in tax returns or submit them online even if the shutdown stretches into February.

But depending on how long the shutdown lasts, there could be some problems.

First, tax refunds won’t be issued. Although tax filing season starts in January, the IRS typically takes a few weeks to start getting refunds out.

So if the shutdown ends soon, there shouldn’t be a big impact on 2018 tax refunds. If the shutdown lasts beyond the first few weeks of January, expect at least some delays on the refunds (since, after all, the government is running out of cash).

One group that could be affected: those still waiting on tax refunds from before 2018. As long as the government remains closed down, don’t expect to get that money.

Meanwhile, the IRS will also stop several other functions: audits, return examinations, non-automated collections, and 1040X processing, among other operations. (For a full list, read the IRS’s contingency plan.) Depending on how long the shutdown lasts, the IRS may opt to restart some of these functions no matter what — but the employees carrying out this work may not be paid for it until Trump and Congress agree to a spending deal.

One other area in which the IRS may have problems is the continuing implementation of the 2017 tax legislation passed by Republicans in Congress and signed by Trump. As the IRS’s contingency plan noted, the law’s implementation “requires creating or revising hundreds of tax products including worksheets and tax forms, form instructions and publications as well as changes to current IRS policies and procedures.” That work is likely to be stalled by a shutdown.

There’s a big caveat to all of this: The longer the shutdown goes on for, the worse the problems will get. The IRS is already going to have to update its contingency plan now that the shutdown has lasted longer than five business days. If the shutdown lasts much longer, the IRS will likely have to make more and more changes on the spot.

The difference between a tax deduction and a tax credit

What is the difference between a tax deduction and a tax credit?

Tax deductions and credits are terms often used together when talking about taxes. While you probably know that they can lower your tax liability, you might wonder about the difference between the two.

A tax deduction reduces your taxable income, so when you calculate your tax liability, you’re doing so against a lower amount. Essentially, your tax obligation is reduced by an amount equal to your deductions multiplied by your marginal tax rate. For example, if you’re in the 22% tax bracket and have $1,000 in tax deductions, your tax liability will be reduced by $220 ($1,000 x 0.22 = $220). The reduction would be even greater if you are in a higher tax bracket.

A tax credit, on the other hand, is a dollar-for-dollar reduction of your tax liability. Generally, after you’ve calculated your federal taxable income and determined how much tax you owe, you subtract the amount of any tax credit for which you are eligible from your tax obligation. For example, a $500 tax credit will reduce your tax liability by $500, regardless of your tax bracket.

The Tax Cuts and Jobs Act, signed into law late last year, made significant changes to the individual tax landscape, including changes to several tax deductions and credits.

The legislation roughly doubled existing standard deduction amounts and repealed the deduction for personal exemptions. The higher standard deduction amounts will generally mean that fewer taxpayers will itemize deductions going forward.

The law also made changes to a number of other deductions, such as those for state and local property taxes, home mortgage interest, medical expenses, and charitable contributions.

As for tax credits, the law doubled the child tax credit from $1,000 to $2,000 for each qualifying child under the age of 17. In addition, it created a new $500 nonrefundable credit available for qualifying dependents who are not qualifying children under age 17. The tax law provisions expire after 2025.

For more information on the various tax deductions and credits that are available to you, visit irs.gov.

New Tax Plan in a Nutshell

 

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It cuts the corporate tax rate from 35 percent to 21 percent beginning in 2018. The top individual tax rate will drop to 37 percent. It cuts income tax rates, doubles the standard deduction, and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025.

Here’s a summary of how the Act changes income taxes, deductions for child and elder

Individual Income Taxes

The Act keeps the seven income tax brackets but lowers tax rates. Employees will see changes reflected in their withholding in February 2018 paychecks. These rates revert to the 2017 rates in 2026.

The Act creates the following chart. The income levels will rise each year with inflation. But they will rise more slowly than in the past because the Act uses the chained consumer price index. Over time, that will move more people into higher tax brackets.

Income    Tax Rate

Income    Levels for Those Filing As:

2017

2018-2025 

Single

Married-Joint

10% 10% $0-$9,525 $0-$19,050
15% 12% $9,525-$38,700 $19,050-$77,400
25% 22% $38,700-$82,500 $77,400-$165,000
28% 24% $82,500-$157,500 $165,000-$315,000
33% 32% $157,500-$200,000 $315,000-$400,000
33%-35% 35% $200,000-$500,000 $400,000-$600,000
39.6% 37% $500,000+ $600,000+

It doubles the standard deduction. A single filer’s deduction increases from $6,350 to $12,000. The deduction for Married and Joint Filers increases from $12,700 to $24,000.

It reverts back to the current level in 2026. As a result, 94 percent of taxpayers will take the standard deduction. The National Association of Home Builders and the National Association of Realtors opposed this. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction.

It eliminates personal exemptions. Before the Act, taxpayers subtracted $4,150 from income for each person claimed. As a result, families with many children will pay higher taxes despite the Act’s increased standard deductions.

The Act eliminates most itemized deductions. That includes moving expenses, except for members of the military. Those paying alimony can no longer deduct it, while those receiving it can. This change begins in 2019 for divorces signed in 2018. Prepay any deductions you’d normally take in 2018. Examples include unreimbursed business expenses for employees, home-equity loan interest, and your tax preparer.

It keeps deductions for charitable contributions, retirement savings, and student loan interest. If possible, move any of these deductions from 2018 to 2017. You won’t take them if you take a standardized deduction in 2018.

It limits the deduction on mortgage interest to the first $750,000 of the loan. Interest on home equity lines of credit can no longer be deducted. Current mortgage-holders aren’t affected.

Taxpayers can deduct up to $10,000 in state and local taxes. They must choose between property taxes and income or sales taxes. This will harm taxpayers in high-tax states like New York and California. Prepay any of these taxes by the end of the year to deduct them in 2017. The IRS will only allow prepaid property taxes if the state has already done its 2018 assessment.

The Act expands the deduction for medical expenses for 2017 and 2018. It allows taxpayers to deduct medical expenses that are 7.5 percent or more of income. Before the bill, the cutoff was 10 percent for those born after 1952. Seniors already had the 7.5 percent cutoff.  At least 8.8 million people used the deduction in 2015.  Move any of these expenses into 2017 if you think you’ll take the standard deduction in 2018.

The Act repeals the Obamacare Tax (Fine) on those without health insurance in 2019.

The Act doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples. That helps the top 1 percent of the population who pay it. These top 4,918 tax returns contribute $17 billion in taxes. The exemption reverts to pre-Act levels in 2026.

It keeps the Alternative Minimum Tax. It increases the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint. The exemptions phase out at $500,000 for singles and $1 million for joint. The exemption reverts to pre-Act levels in 2026.

Child and Elder Care 

The Act increases the Child Tax Credit from $1,000 to $2,000. Even parents who don’t earn enough to pay taxes can claim the credit up to $1,400. It increases the income level from $110,000 to $400,000 for married tax filers.

It allows parents to use 529 savings plans for tuition at private and religious K-12 schools. They can also use the funds for expenses for home-schooled students.

It allows a $500 credit for each non-child dependent. The credit helps families caring for elderly parents.

Business Taxes

The Act lowers the maximum corporate tax rate from 35 percent to 21 percent, the lowest since 1939. The United States has one of the highest rates in the world. But most corporations don’t pay that much. On average, the effective rate is 18 percent. Large corporations have tax attorneys who help them avoid paying more.

It raises the standard deduction to 20 percent for pass-through businesses. This deduction ends after 2025. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations. They also include real estate companies, hedge funds, and private equity funds. The deductions phase out for service professionals once their income reaches $157,500 for singles and $315,000 for joint filers. Small business owners should delay any income they can until 2018 to maximize that deduction.

The Act limits corporations’ ability to deduct interest expense to 30 percent of income. For the first four years, income is EBITDA, but reverts to earnings before interest and taxes thereafter. That makes it more expensive for financial firms to borrow. Companies would be less likely to issue bonds and buy back their stock. Stock prices could fall. But the limit generates revenue to pay for other tax breaks.

It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years. It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.

The Act requires stiffens the requirements on carried interest profits. Carried interest is taxed at 23.8 percent instead of the top 39.6 percent income rate. Firms must hold assets for a year to qualify for the lower rate. The Act extends that requirement to three years. That might hurt hedge funds that tend to trade frequently. It would not affect private equity funds that hold on to assets for around five years. The change would raise $1.2 billion in revenue.

The Act eliminates the corporate AMT.  The corporate AMT had a 20 percent tax rate that kicked in if tax credits pushed a firm’s effective tax rate below that level. Under the AMT, companies could not deduct research and development spending or investments in low-income neighborhood. Elimination of the corporate AMT adds $40 billion to the deficit.

Tax Law Changes Started or Continuing in 2017

Tax Law Changes Started or Continuing in 2017

 IR-2016-139, Oct. 25, 2016

WASHINGTON — The Internal Revenue Service today announced the tax year 2017  annual inflation adjustments for more than 50 tax provisions, including the tax rate schedules, and other tax changes. Revenue Procedure 2016-55 provides details about these annual adjustments. The tax year 2017 adjustments generally are used on tax returns filed in 2018.

The tax items for tax year 2017 of greatest interest to most taxpayers include the following:

Estate Tax

Estates of decedents who die during 2017 have a basic exclusion amount of $5,490,000, up from a total of $5,450,000 for estates of decedents who died in 2016.

Social Security Wage Base

The Social Security wage base remains $127,200.

Individual Responsibility Penalties

Penalties are assessed for each month that any individual does not have the minimum essential health insurance coverage. In 2017 the penalty remains at $695 per adult, or 2.5% of income with a family maximum of $2,085.

Premium Tax Credits for Health Coverage

Some taxpayers who obtain health insurance coverage through a qualified marketplace may qualify for health premium tax credits to subsidize the cost of coverage.

Deduction for State and Local Income Taxes

State and local income taxes remains an itemized deduction.

Exclusion From Income of Canceled Debt on Qualified Principal Residence

Debt cancelled from the short sale, foreclosure, or mortgage modification for Qualified Principal Residences is no longer excludable from income under the Mortgage Forgiveness Debt Relief Act. This was extended to the end of 2016. This could also apply to debt that was discharged in 2017 provided that there was a written agreement entered into in 2016.

Standard & Itemized Deductions – Schedule A

The standard deduction for married filing jointly rises to $12,700 for tax year 2017, up $100 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $6,350 in 2017, up from $6,300 in 2016, and for heads of households, the standard deduction will be $9,350 for tax year 2017, up from $9,300 for tax year 2016.

The limitation for itemized deductions to be claimed on tax year 2017 returns of individuals begins with incomes of $287,650 or more ($313,800 for married couples filing jointly).

Personal Exemption Amount Increases

The personal exemption for tax year 2017 remains as it was for 2016: $4,050.  However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $261,500 ($313,800 for married couples filing jointly). It phases out completely at $384,000 ($436,300 for married couples filing jointly.)

Tuition and Fees Deduction

The deduction for tuition and fees is no longer available. The  American Opportunity Credit and Lifetime Learning Credit are both still available to qualified taxpayers.

Deduction for Medical Expenses

Starting in 2017, all taxpayers, including those over 65, are now subject to the 10% of Adjusted Gross Income (AGI) threshold for deducting medical expenses.

Earned Income Credit

The tax year 2017 maximum Earned Income Credit amount is $6,318 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,269 for tax year 2016. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.

Medical Savings Accounts

For tax year 2017 participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,250 but not more than $3,350; these amounts remain unchanged from 2016. For self-only coverage the maximum out of pocket expense amount  is $4,500, up $50 from 2016. For tax year 2017 participants with family coverage, the floor for the annual deductible is $4,500, up from $4,450 in 2016, however the deductible cannot be more than $6,750, up $50 from the limit for tax year 2016. For family coverage, the out of pocket expense limit is $8,250 for tax year 2017, an increase of $100 from  tax year 2016.

The Alternative Minimum Tax

The exemption amount for tax year 2017 is $54,300 and begins to phase out at $120,700 ($84,500, for married couples filing jointly for whom the exemption begins to phase out at $160,900). The 2016 exemption amount was $53,900 ($83,800 for married couples filing jointly).  For tax year 2017, the 28 percent tax rate applies to taxpayers with taxable incomes above $187,800 ($93,900 for married individuals filing separately).

Foreign Earned Income

For tax year 2017, the foreign earned income exclusion is $102,100, up from $101,300 for tax year 2016.

Reminder of Arizona Minimum Wage and Paid Time Laws Currently in Effect

Arizona Minimum Wage and Paid Time Laws Currently in Effect

In the 2016 November election, Arizona voters approved the Fair Wages and Healthy Families Act (the Act), also known as Proposition 206. The Act raised Arizona’s minimum wage incrementally over the next several years, and also requires employers to provide employees with paid sick time off. The Governor’s office signed the Act into law and it was slated to become effective as of January 1, 2017 so employers need to ensure that they are currently in compliance!

 Minimum Wage Increase

Beginning on January 1, 2018, the minimum wage in the state of Arizona will increase from $10.00 to $10.50 an hour. As such, employers currently paying employees $10 per hour will need to take action on January 1, 2018 to ensure that its payroll will be in compliance.

Arizona minimum wage will continue to increase on January 1 of every year up to $12.00 an hour in 2020, as follows:

  • January 1, 2017 was increased from $8.05 to $10.00 an hour
  • January 1, 2018 it will increase to $10.50 an hour
  • January 1, 2019 it will increase to $11.00 an hour
  • January 1, 2020 it will increase to $12.00 an hour

Starting on January 1, 2021, the minimum wage in Arizona will increase each year in correlation to the cost of living.

 Any employers whose employees regularly receive tips or gratuities may continue to pay them up to $3.00 per hour less than the respective minimum wage so long as, with the tips included, they do not fall below minimum wage.

Just as under the current law, the minimum wage provisions do not apply to the State of Arizona, the United States, or small businesses with less than $500,000 in gross annual revenue and that are exempt from having to pay minimum wage under the Fair Labor Standards Act.

Mandatory Paid Sick Time (‘PST’)

          1. What Are the Act’s Requirements for Employers

Any employer that did not have a Paid Sick Time (“PST”) policy or practice that met or exceeded the requirements of the FWHFA by the PST effective date of July 1, 2017 needs to do so immediately. Employers with existing policies that met the statutory minima were not required to provide additional PST.  Please note that employers have to have policy revisions that provide employees with information about their statutory rights and duties regarding the use of PST, such as: requesting PST, PST borrowing, treatment of PST upon separation of employment and should be laid out in writing.  The practical implication of the statute is that all employers should already have updated plans of their policies, as well as their leave practices .

The Act also requires that employers include on employee pay statements (or in a notice provided with employee paychecks) the amount of an employee’s accrued PST, the amount of PST used by the employee, and the amount of pay an employee has received as earned PST.  Regardless of whether an employer currently maintains a compliant policy or will be implementing a new policy, an employer must have posted notice of employees’ PST rights on or before July 1, 2017, as described more fully below.

          2. Key Provisions.

a.  Paid Sick Time Defined

Under the FWHFA, all employees of Arizona entities covered by the Act (as described above) will now be lawfully entitled to accrue and use PST as provided by the statute.  The Act defines PST as “time that is compensated at the same hourly rate and with the same benefits, including health care benefits, as the employee normally earns during hours worked.”  In other words, employers must pay employees for their use of PST no differently than they would pay an employee for time actually worked.

               b.  Statutorily Mandated Minimum Accrual of Paid Sick Time

PST accrues at a rate of no less than one hour for every 30 hours actually worked.  For employees who are exempt from overtime and minimum wage requirements of the Fair Labor Standards Act (29 U.S.C. 213(A)(1)), the statute assumes for purposes of PST accrual that the employee works 40 hours per week.  If an exempt employee’s normal workweek is less than 40 hours, his or her PST accrues based on the actual number of hours worked in that normal workweek.

The statute gives latitude to an employer to designate a calendar year, fiscal year, or any another consecutive 12-month period as a “year” for purposes of its PST policy.  The statute is silent on how a “year” is defined by default if the employer fails to specify how it will define a “year” under its policy.

               c.  Accrual Caps

If an employer has 15 or more employees, its employees can accrue a maximum of 40 hours of PST per year, unless the employer selects a higher limit.  If an employer has fewer than 15 employees, the maximum an employee can accrue is 24 hours of PST per year, unless the employer selects a higher limit.

Employers should proceed with caution as to leave accrued under former leave policies and how such leave is treated in relation to any modifications to that policy.  Under the most conservative approach, employees should generally be permitted to retain any accrued PST in their banks as of July 1, 2017.  The statute is silent on whether an employee’s already-accrued PST as of July 1, 2017 may be counted toward his or her statutory cap of 40 (or 24, depending on the size of the employer) hours per year, though, given the Act’s purpose, it may be that such time could be counted toward the cap.  Employers should continue to monitor developments as forthcoming regulations may address the transition year issue.

               d.  Use of PST

An employee may use earned PST as it is accrued.  An employer is required to permit employees to use their accrued PST in either hourly increments or “the smallest increment that the employer’s payroll system uses to account for absences or use of other time[,]” whichever is smaller.  The statute provides for the use of PST in the event of an employee’s own illness or injury, a family member’s illness or injury, and in other situations.  Generally, these categories can be summarized as follows:

  • An employee’s own mental or physical illness, injury or health condition, or the employee’s need to seek medical diagnosis, treatment, or preventative care;
  • A family member’s mental or physical illness, injury or health condition, or the family member’s need to seek medical diagnosis, treatment, or preventative care;
  • Closure of the employee’s workplace due to a public health emergency, or an employee’s need to care for a child whose school or place of care has been closed due to a public health emergency;
  • When an employee or employee’s family member’s “presence in the community may jeopardize the health of others” due to exposure or suspected exposure to a communicable disease; and
  • Absences due to domestic violence, sexual violence, abuse, or stalking of an employee or employee’s family member, as these terms are defined in the statute, if the leave is to address the psychological, physical, or legal effects on the employee or the employee’s family member.

The Act defines “family member” broadly as a spouse or legally registered domestic partner, a grandparent, grandchild, sibling, or person who stood in loco parentis of an employee or his or her spouse or domestic partner, a biological child, adopted child, foster child, stepchild, of the employee or the employee’s spouse or domestic partner, regardless of age, a child to whom the employee or employee’s spouse or domestic partner stands or stood in loco parentis, regardless of age, and any other individual related by blood or affinity whose close relationship is the equivalent of a family relationship.

Employers should note that, in some ways, the Act provides for broader use of PST than would be permitted under the FMLA (such as in domestic violence situations), but in others, the Act provides narrower coverage than the FMLA.  For example, a conspicuous absence from the Act’s approved list of PST uses is for the birth of a child or care of a newly adopted child.  However, because the Act expressly states that it shall not be construed to preempt or conflict with federal statutes, there is no reason yet to believe that the Act would interfere with an employer’s right under the FMLA to require that an employee’s paid time off benefits, of which PST would be a part, run concurrently with his or her use of FMLA leave.

While all employees must begin to accrue PST under the Act on July 1, 2017 or their date of hire, whichever is later, an employer may require that employees hired after July 1, 2017 wait 90 days from their date of hire before they are permitted to use accrued PST.

               e  Requesting PST

An employee’s request for PST “may be made orally, in writing, by electronic means or by any other means acceptable to the employer.”  If possible, an employee’s leave request must include the expected duration of the leave.  If an employee’s need to use leave is “foreseeable,” employees must make a “good faith effort” to give their employers advance notice and schedule their absences in a way that lessens the impact on the employers’ businesses, much like an employee’s obligation when using FMLA leave.  For “unforeseeable leave,” employers may require that employees give notice of the leave if the notice requirements are clearly set forth in writing and that written description is disseminated to the employee.  The statute does not appear to place restrictions on the procedures an employer may require for notice of unforeseeable leave, but an employer should be hesitant to place an unreasonably onerous burden on employees to give notice of unforeseeable leave.

Note that the statute does not define the terms “foreseeable,” “unforeseeable,” and “good faith effort,” so employers should continue to monitor further developments.  Generally, a common-sense approach in interpreting these terms should be applied.  Employers should refrain from ascribing meaning to these terms that could be viewed as unduly punitive to employees.

               f.  Requesting Verification of The Reason for PST Use

The statute permits an employer to request “reasonable documentation” that earned PST is used for a proper purpose only where an employer seeks to use three or more consecutive work days of PST. “Reasonable documentation” is defined as “documentation signed by a health care professional indicating that the earned paid sick time is necessary.”  Where three or more consecutive PST days are used in cases of domestic violence, sexual violence, abuse, or stalking, the statute provides alternative forms of reasonable documentation that may be requested, such as a police report, a protective order, or a signed statement from the employee or other individual (a list of which appears in the statute) affirming that the employee was a victim of such acts.

The inference to be drawn from this language is that an employer may not ask for verification of the reason for an employee’s use of PST if the employee uses only one or two consecutive days.  Employers who currently follow a policy of requesting a doctor’s note for any single-day absences should pay close attention to this change and modify its practices accordingly.

               g.  Carry-Over Limits

An employee must be permitted to carry over unused, accrued PST to the next year, but cannot use this carried-over amount to increase his or her maximum use caps for that year.  By way of example, an employee may carry over ten hours of unused accrued PST to a following year, accrue an additional 40 hours, but would still not be permitted to use over a total of 40 (or 24, depending on the size of the employer) hours of PST per year.  Employers should continue to monitor whether limitations on carryover are discussed in any forthcoming regulations.

               h.  End-Of-Year Payout Option

While the Act does give an employer the option to pay out unused, accrued PST to employees at the end of the year, this option is not without its drawbacks.  The Act requires that, if an employer exercises its pay-out option, it must then “provide the employee with an amount of earned paid sick time that meets or exceeds the requirements of [the Act] that is available for the employee’s immediate use at the beginning of the subsequent year.”  This perplexing requirement appears to diminish an employer’s incentive to exercise this option by accelerating the employee’s PST accrual for the subsequent year and requiring that the employer provide the employee with a “full” bank of accrued hours for the employee’s immediate use at the beginning of that year, as opposed to requiring that the employee gradually accrue these hours as usual.

               i. PST Borrowing

The statute permits an employer, in its discretion, to allow an employee to borrow PST time from a subsequent year before it is earned; however, there is no provision in the statute speaking to an employer’s ability to recover borrowed PST if the employee in question separates from employment before he or she actually accrues the borrowed PST.  While we are hopeful that this grey area will be addressed in forthcoming regulations, employers would be prudent to ensure they are complying with A.R.S. § 23-352(2) in the event they decide to recoup such borrowed PST from employees’ wages, and understand that, in the absence of legislative guidance on this issue, doing so is not without risk.

               j.  Treatment of PST Upon Conclusion of Employment

Employers are not required to pay unused, accrued PST to employees whose employment terminates for any reason, including involuntary termination, voluntary resignation, layoff, or death.  However, if an employer rehires a separated employee within nine (9) months, all PST that the employee had accrued at the time of his or her separation must be reinstated.

               k.  Notice Requirements

The Act provides that in addition to the information that must now be included with an employee’s pay statement (see Section 3(a) above), employers must give employees written notice informing them, at a minimum, of the following:

  • Employees’ entitlement to earn PST and the rate at which employees will accrue PST;
  • The terms of use of PST as provided by the Act;
  • That retaliation against employees requesting or using PST is prohibited;
  • Employees’ right to file a complaint if PST use is unlawfully denied or retaliated against; and
  • The contact information for the Commission where questions about rights and responsibilities under the Act can be answered.

Under the Act, such notices must have been provided by the statute’s effective date of July 1, 2017, or the date of hire, whichever is later, and must be in English, Spanish, and “any language that is deemed appropriate by the commission.”  Civil penalties apply for failure to post such a notice.  Sample notices in each language will be provided by forthcoming regulation prior to the Act’s effective date.  It also appears that employers must also post notices, as will be specified, notifying employees of their rights under the Act.

               l.  Anti-Discrimination and Retaliation

The Act provides that it is “unlawful for an employer or any other person to interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right protected” by the Act.  In sum, much like the ADA and FMLA, the FWHFA carries with it provisions against discrimination and retaliation for requesting or using PST, or any other exercise of rights provided by the Act.  Also like the FMLA, the Act prohibits employers from counting the use of PST “as an absence that may lead to or result in discipline, discharge, demotion, suspension, or any other adverse action.”  There is a presumption that any adverse employment action taken within 90 days of an employee’s exercise of rights under the Act is retaliatory, unless there is “clear and convincing” evidence that the action was taken for other lawful reasons.  This is a stark contrast to many “no fault” attendance policies that track all absences (whether paid or unpaid) and convert them into adverse points unless the absences are ADA or FMLA related.  Under this new law, any PST day counts as a protected absence and cannot be used or counted toward disciplinary action.

The Act applies the AMWA’s preexisting enforcement mechanisms to the new PST provisions.  Among other things, those enforcement mechanisms permit employees, as well as State agencies, to file lawsuits to assert their PST rights.  In addition to the prospect of defending civil lawsuits, employers may face investigations by the State of Arizona or its political subdivisions, including inspections and monitoring, and civil penalties, for violations of the Act.

Recordkeeping Requirements.  The Act requires employers to add to their existing Arizona Minimum Wage Act recordkeeping obligations details of an employee’s PST use and accrual for four (4) years.  There is a rebuttable presumption that an employer who fails to maintain such records did not pay statutorily earned PST.

 

 

 

Seven Mid-Year Tax Moves

Seven Mid-Year Tax Moves

After April 15, most of us are happy to ban all thoughts of income tax until next April’s deadline looms. But taking a little time to do a mid-year check-in and tune up can really be worth it – saving you last-minute panic and big bucks. Summer is a good time to make sure you’re on track because, for a lot of people, the pace is a little slower.  If you wait until year-end to check on your tax status, you’ll be right in the middle of holiday season. And summer is your tax advisor’s slow time, too. Here are some points experts recommend you cover in a mid-year checkup.

1. If you have an extension to file your 2016 tax return, do it now.

Why wait until Oct. 15, when the return is due? If you’re expecting a refund, the money should be earning interest for you, not the government. And if by some chance you’ve miscalculated (and underpaid) the tax you owe, the sooner you pay up the better. Penalties and interest start to accrue the day after the April tax deadline, even if you have filed for an extension.  And if the reason you’ve been procrastinating about filing is because you can’t pay what you owe, “don’t let that stop you ….. File the return – you can always ask for an installment plan to pay.”

2. Are you on track with tax payments so far?

If you’ve had, or expect to have, any life-changing events during the year – marriage, divorce, having a child, buying a house, a spouse taking or leaving a job – you may need to adjust the amount of tax that’s being withheld from your paycheck. You don’t want to give Uncle Sam a big interest-free loan, but you don’t want any underpayment penalties, either (although they’re only 3% right now). The IRS has a withholding calculator, so you can get it right. If you need to make any adjustments, file a new W-4 form with your employer.

If you’re self-employed and make estimated tax payments it’s helpful to closely monitor your income and expenses throughout the year, so that you know what you owe and set aside enough money to make the quarterly installments. There’s a “safe harbor” with no underpayment penalties if you pay at least 100% of the tax you owed last year (110% if your adjusted gross income last year was more than $150,000) or 90% of the current year’s tax.

But there may be surprises in store for high-income taxpayers, especially if you’re landing in that category for the first time.  It’s not so hard for a married couple to find themselves hitting the $250,000 threshold. When that happens, new tax issues come up, such as additional Medicare taxes and the phase-out of personal exemptions and itemized deductions, which you’ll need to account for in your estimated taxes and withholding.

3. Eyeball your retirement accounts.

Could you afford to bump up your contributions or even max them out? “Some companies are limiting and cutting back on their 401(k) contributions, but that doesn’t mean YOU should. Check on your investments and asset allocation.

4. Are you close to the itemize/don’t-itemize point for deductions?

If so, you may want to use a strategy called bunching, in which you push discretionary write-offs into a year when you’re going to itemize, rather than one when you take the standard deduction. Think of scenarios / examples such as the following: At mid-year, it looks like you’re almost at the point where you could itemize. You usually give $1,000 to a particular charity each year. You’re close to retirement, so next year you won’t need the deductions to offset as much income. So this year you double up on your contribution to take advantage of itemization when you need it.

5. Get organized – there’s an app for that.

Who hasn’t vowed on April 16, “Next year I’m going to stay on top of my tax receipts”.  If you still haven’t acted on that vow, avoid another marathon session of receipt logging next April by enlisting the help of an app. For instance, Shoeboxed Receipt and Mileage Tracker lets you scan receipts (valid for IRS documentation) with your iPhone, iPad or Android mobile device, making it easy to track your expenses and deductions as you go along. The DIY program is free, or you can choose a paid plan (starting at $9.95/month after a free trial) that lets you mail in your receipts. Keeping up-to-date with expenses and maximizing your tax deductions is particularly important if you have business travel and entertainment expenses, or need to track business use of your personal car.

6. Are you within tax limits for renting out your vacation home?

If you rent out your vacation home when you’re not using it, you can generally deduct expenses such as mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance and depreciation against your rental income. But you won’t be able to take a loss if you make personal use of the home for more than 14 days a year, or 10% of the days it is rented to others at a fair rental price (whichever is greater). If you spend the day at your home making repairs, it’s not considered personal use, even if your family is there for other reasons. But if you rent the home to a close family member, even at market rate, it is.

7. Could you be taking advantage of the 25D energy credit?

The 25C energy credit expired at the end of 2013, but the 25D credit has been extended to last through Dec. 31, 2021. It covers 30% of the cost of solar water heaters, solar panels that generate electricity directly for your home, small wind turbines, “qualified fuel cell property” and geothermal heat pumps. It can be used for a primary residence or a vacation home that you own.

The Bottom Line

Take advantage of summer to lock in tax breaks and catch up with any payments you owe. It’s the slow period in the world of tax advising, and, therefore, a good time to plan ahead before the year speeds up in December.

 

Due Date Approaches for 2016 Federal Income Tax Returns

Due Date Approaches for 2016 Federal Income Tax Returns

Tax filing season is here again. If you haven’t done so already, you’ll want to start pulling things together — that includes getting your hands on a copy of last year’s tax return and gathering W-2s, 1099s, and deduction records. You’ll need these records whether you’re preparing your own return or paying someone else to do your taxes for you.

Don’t procrastinate

The filing deadline for most individuals is Tuesday, April 18, 2017. That’s because April 15 falls on a Saturday, and Emancipation Day, a legal holiday in Washington, D.C., is celebrated on Monday, April 17. Unlike last year, there’s no extra time for residents of Massachusetts or Maine to file because Patriots’ Day (a holiday in those two states) falls on April 17 — the same day that Emancipation Day is being celebrated.

Filing for an extension

If you don’t think you’re going to be able to file your federal income tax return by the due date, you can file for and obtain an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 16, 2017) to file your federal income tax return. You can also file for an extension electronically — instructions on how to do so can be found in the Form 4868 instructions.

Filing for an automatic extension does not provide any additional time to pay your tax! When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the April filing due date. If you don’t pay the amount you’ve estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension.

Note: Special rules apply if you’re living outside the country or serving in the military and on duty outside the United States. In these circumstances you are generally allowed an automatic two-month extension without filing Form 4868, though interest will be owed on any taxes due that are paid after April 18. If you served in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file.

What if you owe?

One of the biggest mistakes you can make is not filing your return because you owe money. If your return shows a balance due, file and pay the amount due in full by the due date if possible. If there’s no way that you can pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you’ll limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the remaining balance (options can include paying the unpaid balance in installments).

Expecting a refund?

The IRS is stepping up efforts to combat identity theft and tax refund fraud. New, more aggressive filters that are intended to curtail fraudulent refunds may inadvertently delay some legitimate refund requests. In fact, beginning this year, a new law requires the IRS to hold refunds on all tax returns claiming the earned income tax credit or the refundable portion of the Child Tax Credit until at least February 15.

Most filers, though, can expect a refund check to be issued within 21 days of the IRS receiving a return.

New Due Date, Filing Extensions, & Penalties for Form W-2 & 1099 Misc

New Due Date, Filing Extensions, & Penalties for Form W-2

According to the 2016 General Instructions for Forms W-2 and W-3 published by the IRS:

  • New Due Date for Forms   W-2 — January 31, 2017 is now the due date for filing 2016 Forms W-2 and W-3 with the SSA, whether filing using paper forms or electronically. (Forms W-2AS, W-2CM, W-2GU, W-2VI, and W-3SS are also included.)
  • Extensions Not Automatic — Extensions of time to file Form W-2 with the SSA are no longer automatic. For filings due on or after January 1, 2017, one 30-day extension may be requested. However, the IRS will only grant the extension in extraordinary circumstances or catastrophe.
  • Higher Penalty Amounts — Higher penalty amounts apply to returns required to be filed after December 31, 2015 and are indexed for inflation.
New Due Date for Form 1099-MISC Box 7 Use

According to the 2016 General Instructions for Certain Information Returns:

  • New Due Date for Forms 1099-MISC Using Box 7 — January 31, 2017 is now the due date for filing Forms 1099-MISC when reporting nonemployee compensation payments in box 7. Otherwise, file on paper by February 28, 2017, or file electronically by March 31, 2017. (The due dates for furnishing payee statements remain the same.)
  • Electronic Filers must use the FIRE System. The IRS has included a “First Time Filers Quick Reference Guide” in Publication 1220 (page 2).
  • Extensions — A 30-day extension must be requested by the due date of the return. Under certain hardship conditions, an additional 30-day extension can be requested. For more information, go to https://www.irs.gov/pub/irs-pdf/i1099gi.pdf (page 6).

More detailed information is available at https://www.irs.gov/pub/irs-pdf/p1220.pdf

New Overtime Rules -The Small Business Owner’s Guide to Obama’s Overtime Rules

If you’ve opened the internet or a newspaper in the past week, you’ve definitely heard about the Obama Administration’s newly enacted changes to overtime rules.

Politics aside, you probably have some concerns about these changes since there’s a good chance the Department of Labor’s ruling will directly impact you and your business.

Before we get into the changes you’ll need to make in order to comply with the new rules, let’s first review precisely what those changes are (remember, they take effect Dec. 1, 2016).

Proposed changes to overtime rules

The current rules, which expire Nov. 30, dictate that salaried workers making more than $455 a week, or $23,660 a year, do not qualify for required overtime pay. The new changes more than double that threshold to $913 a week, or $47,476 a year.

So how about that awesome employee you’ve been paying $40,000 who definitely pulls more than 40 hours a week? They will soon be entitled to overtime compensation at time-and-a-half for every hour after 40 hours a week. (The overtime compensation rules do provide exceptions for employees who perform duties that are mainly executive, administrative, or professional. Those employees would not be entitled to overtime and could remain exempt (i.e. salaried as opposed to hourly).

To be certain you know just how to classify any role that could be affected by the new rules, you’ll have to review their job description and subject it to the “duties test,” http://www.flsa.com/coverage.html which describes the specific duties that qualify employees for exemption from overtime pay.

In case you were wondering about a business making less than $500,000 of annual revenue, it turns out that there is no exception for small businesses, even though the Department of Labor FAQ fact sheet does say that “the proposed rule applies to employees of enterprises that have an annual gross volume of sales made or business done of $500,000 or more, and certain other businesses.”

So if your business makes less than $500,000 of annual revenue, is it exempt? Probably not! Under the Fair Labor Standards Act (FLSA), individual employees may still be “covered in any workweek when they are individually engaged in interstate commerce, the production of goods for interstate commerce, or an activity that is closely related and directly essential to the production of such goods.”

Well, that cleared it up, right?? Leave it to federal lawmakers to really make sure you’re crystal clear on the new regulations that affect your business. LOL!! Now all cynicism aside, this is a serious topic that you might want to sort out with your professional expert.

What really determines if an employee falls within one of the white collar exemptions?

 To qualify for exemption, a white collar employee generally must:

  1. be salaried, meaning that they are paid a predetermined and fixed salary that is not subject to reduction because of variations in the quality or quantity of work performed (the “salary basis test”);
  2. be paid more than a specified weekly salary level, which is $913 per week (the equivalent of $47,476 annually for a full-year worker) under this Final Rule (the “salary level test”); and
  3. primarily perform executive, administrative, or professional duties, as defined in the Department’s regulations (the “duties test”).

Certain employees are not subject to either the salary basis or salary level tests (for example, doctors, teachers, and lawyers). The Department’s regulations also provide an exemption for certain highly compensated employees (“HCE”) who earn above a higher total annual compensation level ($134,004 under this Final Rule) and satisfy a minimal duties test. 

In the end, these proposed changes are a big deal with many implications, and the confusion you may feel around them isn’t your imagination. As The L.A. Times reports:

According to the Obama administration, the new employers could cost employers between $240 million and $255 million per year in direct costs.

Business groups estimate the costs would be much higher. A recent study commissioned by the National Retail Federation estimated employers could shell out as much as $874 million to update payroll systems, convert salaried employees to hourly, and track their hours if similar regulations were imposed.

There is a little time left until December 1, 2016, so you should start planning now!

 

IRS Issue Number: HCTT-2016-68 Maintaining Eligibility for Advance Payments of the Premium Tax Credit

To Maintain Eligibility for Advance Payments of the Premium Tax Credit, File ASAP

The IRS is sending letters to taxpayers who received advance payments of the premium tax credit in 2016, but who have not yet filed their tax return. You must file a tax return to reconcile any advance credit payments you received in 2016 and to maintain your eligibility for future premium assistance. If you do not file, you will not be eligible for advance payments of the premium tax credit in 2017.

If you receive Letter 5858 or 5862, you are being reminded to file your 2016 federal tax return along with Form 8962, Premium Tax Credit.  The letter encourages you to file within 30 days of the date of the letter to substantially increase your chances of avoiding a gap in receiving assistance with paying Marketplace health insurance coverage in 2017.

Here’s what you need to do if you received a 5858

  • Read your letter carefully.
  • Review the situation to see if you agree with the information in the letter.
  • Use the Form 1095-A that you received from your Marketplace to complete your return. If you need a copy of your Form 1095-A, log in to your HealthCare.gov or state Marketplace account or call your Marketplace call center.
  • File your 2016 tax return with Form 8962 as soon as possible, even if you don’t normally have to file.
  • If you have already filed your 2016 tax return with Form 8962, you can disregard the letter.

Here’s what you need to do if you received a 5862 letter:

  • Read your letter carefully.
  • Review the situation to see if you agree with the information in the letter.
  • Use the Form 1095-A that you received from your Marketplace to complete Form 8962. If you need a copy of your Form 1095-A, log in to your HealthCare.gov or state Marketplace account or call your Marketplace call center.
  • File your 2016 tax return with Form 8962 as soon as possible, even though you have an extension until October 15, 2017, to file.

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